With Oracle bid off the table, pressure rises on BEA

Oracle CEO Larry Ellison has put the pressure on BEA management. Photo: Oracle

BEA Systems rebuffed Oracle CEO Larry Ellison's $6.66 billion hostile takeover bid by letting it expire on Sunday, but this game is far from over. BEA's management now faces more pressure, not less, to sell the business software company.

That's because the San Jose-based company has the tough task of convincing anxious shareholders that it really is worth $1.5 billion more than Ellison's Oracle (ORCL) was willing to pay. It doesn't help that BEA's stock is now trading below the $17 per share that Oracle offered, and far below the $21 per share management insists it should fetch.

BEA (BEAS) executives might not have much time to prove the company's value. Activist investor Carl Icahn, who had already bought a 13 percent stake in BEA to push for a sale, is threatening to lead a shareholder revolt against BEA's management unless they auction the company off to the highest bidder – which, so far, had been Ellison. In a letter sent Friday, Icahn was particularly critical of the rough way BEA handled Ellison's advances.

"I view your public declaration of a $21 per share 'take it or leave it' price as a management entrenchment tactic, not a negotiating technique," he wrote.

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One can't help feeling that BEA's board might be outmatched. After all, Oracle CEO Ellison has a reputation for eating smaller software outfits for breakfast; the software giant has swallowed more than 30 companies in the past three years. Most famously, Oracle digested PeopleSoft in a $10 billion hostile transaction that ranks as the second-largest merger in software industry history.

Back when Oracle stalked PeopleSoft, the target company used tactics that BEA executives clearly have studied. At the time, Oracle first made a low offer that PeopleSoft management dismissed as an attempt to distract the company and its customers – but Oracle eventually ended up paying 61 percent more than its initial bid.

BEA management seems to have been betting on a similar outcome when Oracle came calling. Days after Oracle's bid, which was 25 percent higher than the company's trading price at the time, BEA insisted that Oracle could afford to pay more.

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But analysts don't think BEA is likely to command a premium from Oracle — partly because Oracle had already offered a healthy premium, and because Icahn has been pushing BEA to sell. In that kind of environment, Oracle has most of the leverage.

Now Ellison and his team can sit back and watch BEA shareholders squirm. BEA management has already declared that they won't embrace any offer of less than $8.2 billion for the company, which would make it the third-largest software acquisition in history. But no one other than Oracle seems willing to pay even $6.66 billion, even though analysts see companies like IBM (IBM), Hewlett-Packard (HPQ) and SAP (SAP) as reasonable suitors. Oracle has said that if investors don't like the way BEA management is behaving, they can feel free to stage a mutiny. Meanwhile, Oracle will take its $8 billion cash hoard and shop elsewhere.

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That puts the burden on BEA management to either find another buyer, or boost the company's stock price some other way. If BEA can't do either, and the stock price drifts downward, don't be surprised if Oracle makes another bid – but for less than the first one.